Monday 1 March 2010

The importance of branding in economy in general and what it really means in particular

Branding Definition: "Entire process involved in creating a unique name and image for a product (good or service) in the consumers' mind, through advertising campaigns with a consistent theme. Branding aims to establish a significant and differentiated presence in the market that attracts and retains loyal customers."

Branding Definition in Economy as per this blog: "Entire process in creating a unique term for an economic policy or financial product in the consumers' mind, through consistent communication in the news." The best example to mind comes when you think about High Yield bonds, which should really be called Junk bonds, or more recently "Quantitative Easing" which should really be called printing money out of thin air...

Here is the link to Wikipedia about QE (Quantitative Easing):

"Quantitative easing is seen as a risky strategy that could trigger higher inflation than desired or even hyperinflation if it is improperly used and too much money is created.

Some economists argue that there is less risk of such an outcome when a central bank employs quantitative easing strictly to ease credit markets (e.g. by buying commercial paper), whereas hyperinflation is more likely to be triggered when money is created for the purpose of buying up government debts (i.e. treasury securities) which in turn can create a political temptation for governments and legislatures to habitually spend more than their revenues without either raising taxes or risking default on financial obligations."

MV=PT as per Irving Fisher's equation. The Bank of England bought 200 Billions worth of long dated Gilts with QE. The BOE by pumping M (M4) is expecting T to rise and it is not really happening...
As a reminder: MV = PT. M is the stock of money in the economy,V is the velocity of circulation or the speed at which money flows around the economy. P is the price level and T the value of transactions, or gross domestic product (GDP). Hence by
increasing ‘M’, QE aims to increase ‘T’.

The main risk of QE was that the money pumped into the system would not result in higher
spending and economic activity. Banks are currently using all these additional funds to help repair balance sheets. Increased availability of credit is not resulting in more lending. Many companies and individuals do not want to increase borrowing during a period of economic uncertainty and this is the reason why savings are going up and people are trying to repay their debt.

Therefore the initial MV = PT equation means that a rise in ‘M’ leads in reality to a fall in ‘V’ leaving no net benefit.

As per my previous blog post in February, first we are seeing deflation then comes the big risk of hyperinflation which explains why so many famous hedge fund managers like Tudor, Soros, Paulson and others have fallen to the gold bug and have as well increased recently their holdings in Gold in size...

The results of QE will be an increase in inflation down the line.

This also bring us to the recent violent currency movements we have seen in the markets and particularly on GBP. The United Kingdom faces massive headwinds and with the risk of a hung parliament with the upcoming election, the prospect for GBP currency could not be bleaker. GBP will probably come under significant pressure and I can easily see GBP at parity with the Euro, not to mention that the coveted AAA of the UK is threatened.

Bill Gross from PIMCO in his latest market comment talks as well of the sovereign risks ahead of us:

The importance of looking at the Macro picture has never been more important than today.

You should look at safe harbors such as Australia, Canada, and developing countries like China, India, etc.

I also agree with Bill Gross comments:

"An investor’s motto should be, “Don’t trust any government and verify before you invest”."

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